Final Results - Part 2 of 5

RNS Number : 4308Z

Standard Life plc

07 March 2013

Standard Life plc

Preliminary Results 2012

Part 2 of 5

Standard Life plc

Preliminary Results

2012

Section	Contents	Page
	Press release	2
1	Business review	10
1.1	Chief Executive's overview	10
1.2	Group key financial performance indicators	13
1.3	Chief Financial Officer's Group overview	14
1.4	Business segment performance	20
	1.4.1 UK and Europe	20
	1.4.2 Standard Life Investments	24
	1.4.3 Canada	27
	1.4.4 Asia and Emerging Markets	30
1.5	Risk management	32
1.6	Our customers	34
1.7	Our people	36
1.8	Basis of preparation	38
2	International Financial Reporting Standards (IFRS)	39
	IFRS primary statements	39
	IFRS notes	45
3	European Embedded Value (EEV)	70
	EEV primary statements	70
	EEV notes	73
4	Supplementary information	101
4.1	EEV and EEV operating profit	101
4.2	Reconciliation of operating profit to EEV operating capital and cash generation	102
4.3	Group EEV capital and cash generation	103
4.4	Reconciliation of key capital measures	103
4.5	Group assets under administration and net flows	104
4.6	Analysis of new business	112

The Preliminary Results 2012 are published on the Group's website at www.standardlife.com

The Directors are responsible for the maintenance and integrity of the financial information published on the website in accordance with UK legislation governing the dissemination of financial statements.

Access to the website is available outside the UK, where comparable information may be different

1 Business review

1.1 Chief Executive's overview

Objectives and strategy

Our strategic objectives and our performance against them are illustrated below. Find out more on how our businesses performed in Section 1.4 - Business segment performance. Our strategic objectives and ultimately our ability to generate value for our shareholders may be subject to financial and non-financial risks. Principal risks and our risk management approach are discussed in more detail in Section 1.5 - Risk management.

Our strategic objectives

Corporate: Building on strength in pension savings and corporate benefits

Retail: Focusing on the savings and investments needs of customers in our chosen segments

Our performance

in 2012

· In the UK, 118,500 new individuals joined our pension schemes in 2012

· In the UK, 137 new corporate schemes were won (2011: 167 corporate schemes) including our first Master Trust scheme with 24,000 members

· Profit contribution from our UK corporate business increased by 80% to £88m (2011: £49m)

· In Canada, group savings and retirement product enhancements and enhanced presence in key markets and channels, enabled us to win 135 new defined contribution accounts, increasing members to 572,000 (2011: 561,000)

· Our wrap platform continued to attract new advisers and large financial institutions such as RBS Group

· In 2012, Standard Life Wealth was recognised as the fastest growing provider of discretionary investment management services in the UK

· Success of MyFolio risk based funds with assets of £2.2bn

· Our SIPP proposition continues to grow with a 18% increase in customers and AUA up 17% to £19.6bn (2011: £16.8bn)

Competitive advantages and market opportunities

· We are an industry-leading provider of workplace benefit solutions in the UK and our momentum in the corporate market continues

· Auto enrolment is expected to increase levels of employee participation in the 35,000 UK schemes we administer for our clients

· We remain well placed for introduction of Pooled Registered Pension Plans in Canada

· Launched RDR compliant solution ahead of regulatory deadline

· Investment in technology is delivering improved service for our customers. We will continue to leverage technology to deliver efficient, scalable and robust operations.

· Developing operations in Singapore and Dubai, further broadening our international presence

Our strategic objectives

Expanding the global reach of our investment management business

Maximising value from the joint venture relationships in Asia

Our performance

in 2012

· Standard Life Investments has continued to increase the proportion of third party net inflows coming from Europe and the US

· Increasing our global distribution reach through our expanded Boston office and inclusion on the John Hancock platform in the US

· Our suite of multi-asset funds have outperformed cash benchmarks over all key time periods since inception and assets were approximately £22bn at 31 December 2012

· Expanded range of high margin propositions including our global emerging markets capability

· HDFC Life in India continues to perform well and has improved its market positioning and grown market share

· HDFC Life was the first private life insurer to launch unit linked pension plans under the new regulatory regime

· In China, Heng An Standard Life has increased market share in the foreign joint venture market

· HDFC Asset Management, our associate business remains the largest mutual fund provider in India with more than five million customers

Competitive advantages and market opportunities

· Standard Life Investments continues to deliver strong investment performance over all key time periods and is well positioned across a diversified range of asset classes

· Continued global product innovation including multi-asset, global fixed income and real estate

· Opportunities for further global growth with strategic partners including Sumitomo Mitsui in Japan and John Hancock in the US

· Increased scope for distribution of Standard Life Investments and HDFC Asset Management investment products

· Banks continue to gain share of distribution in India and we are well positioned due to our strong partnership with HDFC Bank

· Growing distribution capability in China

1.1 Chief Executive's overview continued

Market overview

Market conditions in 2012 remained difficult, with uncertainty around the future of the Eurozone and other economic factors continuing to impact consumer sentiment. However, we believe that our ongoing focus on increasing assets and improving the efficiency and scalability of our business will continue to drive improved returns for our shareholders.

Global financial market conditions remain fragile

· Despite signs of improvement in the UK economy, economic conditions remain uncertain

· UK economic growth remains fragile with the outlook revised downwards over the course of 2012. The impact of the Eurozone crisis on exports and the continued rationing of credit by UK banks contributing towards this.

· The credit rating of the UK was given a 'negative outlook' by the major credit rating agencies in 2012 and in February 2013 Moody's downgraded the UK to AA1 from a AAA rating

· The average daily FTSE All-Share Index rose by 1% between 2011 and 2012 with significant falls in June 2012, followed by a recovery in market levels in the second half of the year

· Canada continues to be impacted by the weakness in the global economy although the domestic economy is performing relatively well

· In Asia, economic policy has provided a safeguard from the worst of the financial crisis. However, economic growth has slowed compared to recent years as a reduction in demand from the Eurozone has impacted exports.

An uncertain economic backdrop impacting consumer sentiment

Other economic factors are also impacting the markets in which we operate including:

· UK inflation has fallen significantly from 2011 levels, however further increases in costs of energy and food have continued to put pressure on households

· Interest rates remained at historically low levels and austerity measures continue globally

· Unemployment in the UK reached a 15-month low in October 2012, however conditions in the employment market remain challenging and wage inflation remains subdued

Contributing to market insight

We regularly publish new insight and support for policy makers and industry stakeholders helping to promote and generate interest in issues relating to long-term savings. For example, in December 2012, against the backdrop of auto enrolment we published Now we're nudging, a follow up report to Keep on nudging published in October 2011, examining how the pension industry can ensure that defined contribution workplace pensions schemes deliver good outcomes for members including those who are automatically enrolled.

Our recommendations included:

· Providing clear and meaningful information to employees on pension charges and investment transaction costs, and the potential returns

· Reviewing the communications provided to individuals in the lead up to retirement, to ensure that they are being given the support needed to make the right decisions

Government legislation

The key legislative and regulatory changes that will affect financial services companies and their potential impact on Standard Life are summarised below:

· The Retail Distribution Review (RDR) went live on 1 January 2013 and is designed to increase transparency in retail financial services and raise professional standards in the UK. The introduction of RDR and the resulting movement from commission to adviser charging has significantly increased the size of our accessible corporate market in the UK.

· The phased implementation of auto enrolment began in October 2012. Some of our larger employer customers were first to 'go live' with small and medium sized employers following over the next few years. Every employer in the UK will be required by law to offer to contribute to their workers' pensions. This represents an exciting opportunity to increase significantly the number of people saving for their retirement. We fully support the recently announced study into the workplace pensions market, which will help ensure that scheme members are receiving value for money, and is crucial to the success of auto enrolment.

· The Canadian Government introduced Pooled Registered Pension Plans (PRPP) in December 2012 which is similar to auto enrolment in the UK. Individual provinces have delayed implementing the PRPP. In the mean time, press and market coverage continues to help drive awareness amongst employees and employers of the greater need for long-term and retirement savings.

· In December 2012, a European Court of Justice ruling took effect that prevents firms from using gender as a factor in determining premiums and benefits in insurance contracts. We have implemented the appropriate changes to ensure that we comply with this ruling.

· Solvency 2 is a major European regulatory change initiative that should bring consistency to the way in which EU insurers manage capital and risk with the aim of enhancing protection for consumers. The timetable for implementation is now expected to be delayed until 1 January 2015 at the earliest.

1.2 Group key financial performance indicators

Group operating profit before tax

Group operating profit is a measure of our ability to deliver long-term returns for our shareholders and provides an indication of our dividend paying capability.

· Group operating profit before tax increased by 65% to £900m. The 2012 result included gains from property sales and a renegotiation of an existing reinsurance arrangement in Canada which contributed £153m together with a £96m benefit in respect of a professional indemnity insurance claim in the UK. The 2011 result included a £64m benefit following the change in the basis of future pension increases in the UK staff pension scheme.

· Fee based revenue increased by £66m to £1,271m driven by higher average asset values and the continued shift towards higher margin products in Standard Life Investments

EEV operating profit beforetax

European Embedded Value (EEV) operating profit measures our ability to effectively manage our existing book of business and to write profitable new business.

· EEV operating profit before tax increased by 13% to £1,116m

· Back book operating profit increased by £243m to £413m from management actions to enhance the value of the existing book of business and the benefit in respect of a professional indemnity insurance claim

· Core EEV operating profit of £697m was 5% lower than 2011, with a higher new business contribution and higher non-covered business profits offset by a lower expected return from existing business reflecting lower opening discount rates

EEV operating capital and cash generation

EEV operating capital and cash generation reflects our ability to generate capital and cash. This enables further investment in the business and the payment of dividends to our shareholders.

· EEV operating capital and cash generation increased by 68% to £734m

· The increase was mainly due to a £307m rise in capital and cash generation from activities to manage our existing book, particularly from the businesses in UK and Canada

· Core operating capital and cash generation decreased by 4% to £348m, reflecting reduced capital and cash generation from existing business due to lower interest rates

Assets under administration and net flows

As a long-term savings and investments business, assets under administration (AUA) and net flows are key drivers of shareholder value. We aim to grow AUA by focusing on our customers and meeting their needs with innovative propositions.

· Group AUA increased by 10% to £218.1bn driven by strong net flows in third party assets at Standard Life Investments and favourable market movements

· Record level of third party assets in Standard Life Investments of £83.0bn (2011: £71.8bn)

· Strong net inflows of £5.0bn against a backdrop of subdued consumer sentiment, ongoing economic uncertainty and increased commission-based competition prior to RDR

Find out more about these measures in Section 1.3 - Chief Financial Officer's Group overview and Section 1.8 - Basis of preparation

1.3 Chief Financial Officer's Group overview

Our financial results demonstrate our ability to deliver high quality returns for our shareholders. We continue to develop market-leading solutions that meet the changing needs of our customers and this has helped us grow the level of assets we administer. Details of our financial performance are highlighted below.

IFRS
	2012	2011	Movement
Group operating profit before tax¹	£900m	£544m	65%
IFRS profit after tax attributable to equity holders of Standard Life plc	£698m	£298m	134%
Group operating return on equity	20.0%	11.9%	8.1% points

IFRS profit

IFRS profit for the year was £727m (2011: £346m). This comprised profit after tax attributable to equity holders of £698m (2011: £298m) and profit attributable to non-controlling interests of £29m (2011: £48m). Operating profit before tax increased by 65% from £544m to £900m and non-operating losses before tax were £142m (2011: loss £214m).

Group operating profit before tax

	2012	2011
	£m	£m
Fee based revenue	1,271	1,205
Spread/risk margin	505	359
Total income	1,776	1,564
Acquisition expenses²	(292)	(325)
Maintenance expenses²	(834)	(800)
Group corporate centre costs²	(47)	(50)
Capital management	175	74
Share of joint ventures' and associates' profit before tax	26	17
Other	96	64
Group operating profit before tax	900	544

Group operating profit before tax increased by 65% to £900m. The key highlights are:

· Fee based revenueincreased to £1,271m driven by higher average asset values and the demand for our higher margin propositions including those in Standard Life Investments and Standard Life Wealth

· Spread/risk marginincreased by £146m to £505m and benefited from specific management actions in Canada which generated a total margin of £109m (2011: £88m). This included a gain of £81m from the reduction in actuarial liabilities arising from the property sales and the renegotiation of an existing reinsurance arrangement as well as £28m from enhancing the investment yields on assets. One-off actuarial reserving changes in Canada generated a gain of £91m compared to a loss of £57m in 2011. The 2012 actuarial reserving changes in Canada included favourable changes in mortality assumptions and revised investment allocations.

· Acquisition expenses² decreased to £292m due to further efficiency improvements and reduced investment spend. Expressed as a proportion of sales, acquisition expenses improved to 156bps (2011: 169bps).

· Maintenance expenses² increased to £834m reflecting further development of our businesses including Standard Life Investments and our operations in Asia.We have continued to see the benefit of our scalable business model with maintenance expenses expressed as a proportion of average AUA improving further to 45bps (2011: 46bps).

· Group corporate centre costs² decreased to £47m (2011: £50m)

· Capital management increased to £175m and includedgains of £72m from property sales in Canada which backed shareholder surplus. There was also higher investment returns on shareholders' funds.

¹Operating profit is IFRS profit before tax adjusted to remove the impact of short-term market driven fluctuations in investment return and economic assumptions, restructuring costs (including the Solvency 2 programme), impairment of intangible assets, amortisation of intangible assets acquired in business combinations, profit or loss on the disposal of a subsidiary, joint venture or associate and other significant one-off items outside the control of management.

²Investment for transformation and growth has been allocated between acquisition expenses, maintenance expenses and group corporate centre costs. Comparatives have been restated.

· Our share of the life joint venture businesses in Asia contributed an operating profit before tax of £8m (2011: £2m), which reflects the progress made, particularly by HDFC Life, in creating a profitable insurance business in India. HDFC Asset Management, our associate business which is included in the results of Standard Life Investments, contributed £18m to profit in 2012 (2011: £15m).

· Other reflects a £96m benefit in our UK business in respect of a professional indemnity insurance claim made in relation to the Standard Life Pension Sterling Fund as previously announced. The 2011 result included a £64m benefit following the change in the basis of future pension increases in the UK staff pension scheme.

Group operating return on equity

Return on equity measures our success in generating profit relative to our shareholder capital. Group operating return on equity increased to 20.0% (2011: 11.9%), benefiting from the significant growth in operating profit and also from a release of prior year tax provisions. Efficient use of shareholder funds is a key component of our business model and we will continue to manage our capital position to ensure that we generate sustainable returns for our shareholders.

Group non-operating loss before tax

Group non-operating loss in 2012 was £142m (2011: loss £214m). Losses from short-term fluctuations in investment return and economic assumption were £29m in 2012 compared with losses of £139m in 2011. The losses in 2012 were mainly due to the impact of adverse movements in the yield curve in Canada. Non-operating restructuring and corporate transaction expenses of £109m (2011: £70m) relate to a number of business unit restructuring programmes, Solvency 2 and the RDR.

Group non-operating loss before tax
	2012	2011
	£m	£m
Short-term fluctuations in investment return and economic assumption changes	(29)	(139)
Restructuring and corporate transaction expenses	(109)	(70)
Other operating profit adjustments	(4)	(5)
Group non-operating loss before tax	(142)	(214)

Find out more about the IFRS results in Section 1.4 - Business segment performance and Section 1.8 - Basis of preparation

Assets under administration and new business
	2012	2011	Movement
Assets under administration	£218.1bn	£198.4bn	10%
Net flows	£5.0bn	£5.4bn	(7%)
Present value of new business premiums	£19.3bn	£19.7bn	(2%)
New business contribution	£339m	£335m	1%

Assets under administration and net flows

AUA increased by 10% to £218.1bn driven by a combination of net inflows across our businesses and positive market movements:

· Fee business AUA increased to £180.7bn (2011: £162.8bn) with 83% of total AUA now related to fee business

· Spread/risk business AUA increased to £25.7bn (2011: £25.2bn) due to positive market movements partially offset by £0.9bn of net outflows driven by scheduled annuity payments

· Total net flows of £5.0bn were strong, particularly into our newer fee based propositions. This was against a backdrop of subdued consumer sentiment, ongoing economic uncertainty, employers delaying implementation of corporate pension schemes ahead of the phased introduction of auto enrolment and increased commission-based competition prior to RDR.

1.3 Chief Financial Officer's Group overviewcontinued

New business PVNBP			New business contribution		PVNBP margin		IRR		Undiscounted payback
	2012	2011	2012	2011	2012	2011	2012	2011	2012	2011
	£m	£m	£m	£m	%	%	%	%	years	years
UK and Europe	14,167	15,105	261	225	1.8	1.5	18	16	6	6
Canada	3,584	2,928	45	73	1.3	2.5	8	16	11	7
Asia and Emerging Markets	1,542	1,705	33	37	2.2	2.2	13	12	7	7
Total	19,293	19,738	339	335	1.8	1.7	13	15	7	7

· Improved new business contribution reflected higher margins in our UK and Europe business, offset by lower margins in Canada

· Present value of new business premiums (PVNBP) for the Group totalled £19,293m and was 2% lower than 2011. UK and Europe sales fell by 6% against a backdrop of subdued customer sentiment and ongoing economic uncertainty.

· UK and Europe internal rate of return (IRR) rose to 18% (2011: 16%) but the low interest rate environment impacted the returns on business written in Canada, resulting in a lower total IRR for the Group of 13% (2011: 15%)

EEV
	2012	2011	Movement
EEV per share	343p	316p¹	9%
EEV operating profit before tax	£1,116m	£989m	13%
EEV profit before tax	£1,334m	£526m	154%
Return on embedded value	12.4%	10.4%	2.0% points

Group embedded value

Group embedded value increased to £8,138m (2011: £7,428m) representing an EEV per share of 343p. EEV per share has increased by 41p before dividend distributions, including EEV operating profit after tax of £876m (37p per share). This resulted in a return on embedded value (RoEV) of 12.4%. EEV non-operating profit after tax was £176m (7p per share). The 3p reduction in EEV per share from other and non-trading items was mainly due to foreign exchange movements.

EEV profit before tax

EEV profit before tax of £1,334m (2011: £526m) included operating profit of £1,116m (2011: £989m) and non-operating profit of £218m (2011: loss £463m).

EEV operating profit before tax

	EEV operating profit before tax		RoEV
	2012	2011	2012	2011
	£m	£m	%	%
Core	697	731	7.4	7.6
Efficiency	6	88	0.1	1.0
Back book management	413	170	4.9	1.8
Total	1,116	989	12.4	10.4

EEV operating profit before tax increased by 13%:

· Core profits decreased by 5% to £697m due to a £45m fall in the expected return from existing business, as a result of lower opening discount rates. This was partly mitigated by an increase of £4m in the value of new business. Core non-covered business generated an EEV operating profit of £16m (2011: £13m). This led to a core RoEV of 7.4% (2011: 7.6%).

· Profit from efficiency gains in 2011 included £50m of management actions to reduce current and future investment expenses in the UK

· EEV operating profit before tax from back book management of £413m (2011: £170m) included a profit of £453m from previously announced management actions. In the UK these consisted of asset strategy changes, improved actuarial modelling and the benefit in respect of a professional indemnity insurance claim. Management actions in Canada included the benefit of improved actuarial modelling and gains from the renegotiation of an existing reinsurance arrangement as well as gains from property disposals.

EEV non-operating profit before tax

Total EEV non-operating profit before tax of £218m (2011: loss £463m) included positive long-term investment return and tax variances of £498m (2011: £70m), which increased primarily due to higher than expected investment returns. The loss from economic assumption changes of £106m (2011: loss £500m) was mainly due to the use of lower projected investment returns, partly offset by profits from lower discount rates, and from changes to tax and inflation assumptions in the UK and Canada.

Restructuring costs of £114m (2011: £73m) primarily represent costs relating to a number of business unit restructuring programmes, Solvency 2 and the RDR. The adjustments for different accounting bases relating to the valuation of inter-Group subordinated debt resulted in a non-operating loss of £42m (2011: gain £58m).

Cash generation
	2012	2011	Movement
EEV operating capital and cash generation	£734m	£438m	68%

Group operating EEV capital and cash generation

Group EEV operating capital and cash generation	2012	2011
	£m	£m
UK and Europe	532	392
Canada	366	168
Asia and Emerging Markets	42	48
Non-covered	10	56
Gross EEV operating capital and cash generation	950	664
New business strain	(216)	(226)
EEV operating capital and cash generation	734	438
Analysed by:
Core	348	362
Efficiency	(3)	(6)
Back book management	389	82
Total	734	438

Total EEV operating capital and cash generation increased by 68% to £734m (2011: £438m):

· Gross EEV operating capital and cash generation increased by £286m mainly as a result of increased capital and cash generation from back book management. New business strain decreased by 4% and as a percentage of PVNBP was unchanged at 1.1%.

· Core capital and cash generation was £14m lower than in 2011, with a £30m reduction in expected return partially offset by £10m lower new business strain and £5m higher core capital and cash generation from non-covered business

· Back book management capital and cash generation of £389m included profits from the renegotiation of an existing reinsurance arrangement and property disposals in Canada, post tax contribution from the UK pension scheme and the benefit in respect of a professional indemnity insurance claim in the UK

Coverage of gross EEV operating capital and cash compared to new business strain increased to 4.4 (2011: 2.9). Coverage of EEV operating capital and cash generation compared to the interim and final dividends declared increased to 2.1 (2011: 1.4).

Reconciliation of Group operating profit to EEV operating capital and cash generation

As with EEV operating capital and cash generation, Group operating profit removes the impact of short-term economic volatility. Whilst there is clear alignment between Group operating profit and EEV operating capital and cash generation, there are differences which include:

· £19m negative impact from the difference in the treatment of assets and actuarial reserves

· £14m negative impact from the difference in the treatment of deferred acquisition costs (DAC)/deferred income reserve (DIR), intangibles, tax and other. Other includes the impact of different methodologies in respect of asset management charges. In EEV operating profit this income is included on an expected return basis but the actual charges are included in Group operating profit.

Capital management
	2012	2011	Movement
IFRS equity attributable to equity holders of Standard Life plc	£4,355m	£3,961m	10%
EEV	£8,138m	£7,428m	10%
Group capital surplus¹	£4.1bn	£3.1bn	32%

¹ 2012 based on estimated regulatory returns. 2011 based on final regulatory returns.

Group capital surplus

Group capital surplus and solvency cover²	2012	2011	2010
	£bn	£bn	£bn
Shareholders' capital resources	3.3	3.1	3.0
Capital resources arising from subordinated debt	1.9	1.1	1.8
SLAL long-term business funds	2.8	3.1	2.6
Group capital resources³	8.0	7.3	7.4
Group capital resource requirement	(3.9)	(4.2)	(3.6)
Group capital surplus	4.1	3.1	3.8
Group solvency cover	204%	173%	205%

²2012 based on estimated regulatory returns. 2011 based on final regulatory returns.

³ Net of restricted assets. 2012: £1.2bn (2011: £1.0bn, 2010: £1.4bn).

As part of our active capital management programme, we have taken advantage of favourable market conditions to optimise the capital position of the Group. We have issued £500m lower tier 2 subordinated debt and CA$400m of lower tier 2 subordinated debenture notes in Canada. This largely replaces the Euro denominated bonds that were redeemed during 2011 and 2012. We have also replaced the scrip dividend option with a dividend reinvestment plan (DRIP). These initiatives further optimise the financial structure of the Group and build on past actions to re-shape our balance sheet.

The Group capital surplus, calculated under the Insurance Groups Directive (IGD), increased to £4.1bn (2011: £3.1bn). The quality of our capital resources remains strong with £6.9bn (2011: £7.0bn) of core tier 1 capital.

The Group capital surplus remains largely insensitive to a 30% fall in equities from the 31 December 2012 position, with the surplus estimated to reduce by approximately £0.3bn (2011: £0.2bn reduction). Following a 100bps rise in yields, the surplus would be expected to reduce by approximately £0.1bn (2011: £0.2bn reduction), while a 100bps fall in yields would be expected to reduce the surplus by approximately £0.4bn (2011: £0.2bn reduction).

Reconciliation of key capital measures

The following diagram illustrates the key differences between regulatory, IFRS and EEV capital measures at 31 December 2012: Diagram removed for the purposes of this announcement. However it can be viewed in full in the pdf document.

Liquidity management and dividends
	2012	2011	Movement
Standard Life plc cash and readily realisable resources	£1,064m	£565m	88%
Full year dividend	£346m	£322m	7%
Special dividend	£302m	-

Liquidity management

The Group maintains a strong liquidity position and this was shown in stress testing undertaken during 2012.

We undertake specific liquidity stress testing to ensure that we can withstand a scenario of significant falls in asset values combined with unprecedented levels of surrenders and claims.

We also maintain contingency funding plans across the Group to ensure that each business unit is prepared for a liquidity issue. As part of this contingency planning, Standard Life plc, the Group's ultimate holding company, maintains a £500m revolving credit facility with a syndicate of banks. The Group's revolving credit facility was undrawn at 31 December 2012. It was renewed on 5 March 2013 and is due to mature in March 2018.

Standard Life plc also holds substantial cash and readily realisable resources. At 31 December 2012, Standard Life plc held £1,064m (2011: £565m) of cash and short-term debt securities.

Standard Life plc cash and readily realisable resources	2012	2011
	£m	£m
Opening 1 January	565	378
Dividends received from subsidiaries	499	499
Cash dividends paid to shareholders¹	(331)	(162)
Additional investments in subsidiaries	(131)	(79)
Additional investments in associates and joint ventures	(16)	(20)
Issue of external subordinated liabilities	497	-
Other	(19)	(51)
Closing 31 December	1,064	565

Dividends

During 2012, Standard Life plc paid the final dividend for 2011 of 9.20p per share, amounting to £216m and the 2012 interim dividend of 4.90p per share amounting to £115m. We propose a final dividend of 9.80p per share making a total 14.70p (2011: 13.80p). This represents an increase of 6.5% per share. We will continue to apply our existing progressive dividend policy taking account of market conditions and our financial performance.

As a result of our strong capital position, we are proposing an additional return of capital to shareholders via a special dividend of 12.80p per share, amounting to £302m. This will be paid alongside the final dividend in May.

1.4 Business segment performance

1.4.1 UK and Europe

Financial highlights

	2012	2011	Movement
Operating profit before tax	£419m	£266m	58%
Operating return on equity	27.8%	15.6%	12.2% points
Assets under administration	£143.4bn	£131.8bn	9%
Net flows	£1,485m	£2,883m	(48%)
EEV covered business operating profit before tax	£799m	£550m	45%
EEV non-covered business operating profit before tax	£41m	£67m	(39%)

Market update

Over the last four years our industry has been preparing itself for the introduction of RDR and pension reform. Our investment in technology, propositions and investment solutions puts us in a unique position to capitalise on these changes. However, in 2012 the market in the UK continued to be impacted by an uncertain economic environment, the last opportunity for providers to pay commission and final preparations for implementation of the above changes. Together with the Government and the media, we have continued to focus on driving consumer and employer awareness of the need for pensions and other forms of long-term and retirement savings.

Much of the attention across our industry in 2012 was focused on the implementation of RDR. We ensured a smooth transition by introducing adviser charging on our Wrap platform before the end of 2012. We also provided extensive support to IFAs in transitioning their business models via threesixty, our intermediary support services business, as well as through their strong relationships with account managers and platform consultants. Our Wrap platform continued to attract both new advisers and large financial institutions such as the RBS Group and we welcome the removal of barriers to re-registration across platforms. Following renegotiations with fund management groups we are also able to offer our customers the benefit of some of the best rebates in the industry as well as market-leading investment solutions from Standard Life Investments and Standard Life Wealth.

The implementation of RDR also impacted the corporate pension landscape across the industry, with significantly increased levels of competition from commission payers. The quality of our workplace propositions, investment solutions, leading levels of customer service as well as the strength of relationships with employee benefit consultants and employers ensured a minimal impact on our business. The start of the phased introduction of auto enrolment in October 2012 led to high levels of enquiries from employers in our target market. Although net flows were lower than originally anticipated as employers delayed decision making until the second half of the year, we saw a significant increase in the pipeline of new business secured which will transition later in 2013 and 2014. We are also encouraged by the take up of our newly launched corporate investment proposition and investment solutions across our new business pipeline. We're ready to take advantage of the opportunities that auto enrolment and RDR will bring in 2013, driving further growth in our business by leading the industry in these areas.

We welcome the recently announced review of pension charges and believe it is a timely check-point as we begin auto enrolment. We simplified our charging structure, reducing charges to a single Annual Management Charge below 1% back in 2001, then led the way in removing mono charge commission in 2006. Both of these actions contributed significantly to the reduction in charges we have seen across the industry in recent years. We took a leading role in driving the recent announcement to improve disclosure of charges and we fully support this initiative.

In Germany, efforts to reposition our brand saw us increase market share in the unit linked segment, while our business in Ireland continued to show resilience despite the impact on our customers of difficult economic conditions and austerity measures. Commission continues to play a role in both Germany and Ireland. However, we are beginning to see interest from advisers wishing to understand more about how we have managed to transform the way in which we do business in the UK and how we have supported IFAs in becoming new-model advisers.

Profitability

Operating profit before tax

	UK		Europe		UK and Europe
	2012	2011	2012	2011	2012	2011
	£m	£m	£m	£m	£m	£m
Fee based revenue	667	625	164	173	831	798
Spread/risk margin	107	75	5	3	112	78
Total income	774	700	169	176	943	876
Acquisition expenses	(174)	(202)	(28)	(24)	(202)	(226)
Maintenance expenses	(356)	(352)	(105)	(107)	(461)	(459)
Capital management	42	10	1	1	43	11
Other	96	64	-	-	96	64
Operating profit before tax	382	220	37	46	419	266

UK and Europe operating profit before tax was £419m. Within this, UK operating profit increased by 74% to £382m, while the result for Europe of £37m was lower than in 2011.

The key movements in the UK operating profit from 2011 are:

· Fee based revenue increased by 7% predominantly driven by higher AUA as new style propositions continue to attract net inflows while older style propositions benefit from ongoing increments, market movements and retention activity. The average revenue yield on fee based business remained broadly stable at 72bps (2011: 73bps).

· Spread/risk margin increased to £107m due to a 38% increase in gross annuity inflows and the positive impact of investment strategy changes. The 2011 result included the impact of annuity reserve strengthening.

· Acquisition expenses of £174m are 14% lower than 2011 and expressed as a percentage of PVNBP improved to 133bps (2011: 144bps) reflecting both the scalability of the business model and absolute cost reductions

· Maintenance expenses increased by just £4m as we continue to benefit from our scalable business model and ongoing efforts to reduce our costs. Expressed as a proportion of average AUA, maintenance expenses improved to 31bps (2011: 34bps).

· Capital management generated a profit of £42m due to the improved funding position of the UK staff pension scheme in the year and the investment of shareholders' funds in higher yielding assets

· Other reflects a £96m benefit in respect of a professional indemnity insurance claim made in relation to the Standard Life Pension Sterling Fund as previously announced. The 2011 result included a £64m benefit following the change in the basis of future pension increases in the UK staff pension scheme.

The Europe operating profit result was impacted by increased reserves held to cover new business in Germany and the impact of adverse currency movements, due to the strength of sterling against the euro.

UK profit contribution¹

UK fee business profit contribution increased by 31% to £321m (2011: £245m), with notable increases in profit contribution from both retail new and corporate.

Newer style UK retail propositions saw continued momentum which, combined with the benefits from scalability, delivered more than five fold increase in profit contribution to £54m. This, together with the stable contribution from older style propositions, helped to drive an overall increase in retail fee based business contribution of 19% to £233m (2011: £196m).

Growth in AUA and efficiency improvements also helped to drive an 80% increase in profit contribution from our corporate business to £88m (2011: £49m).

Profit contribution from spread/risk products increased by 42% to £94m (2011: £66m). This was driven by higher annuity sales and reflected the success of our ongoing customer engagement programme. Profit contribution in 2012 also included the positive impact of investment strategy changes.

UK profit contribution¹	2012	2011
	£m	£m
Retail - new	54	10
Retail - old	179	186
Retail fee based business contribution	233	196
Corporate	88	49
Fee based business contribution	321	245
Spread/risk	94	66
UK profit contribution	415	311
Indirect expenses and capital management	(129)	(155)
Other	96	64
UK operating profit	382	220

¹ Profit contribution reflects the income and expenses directly attributable to each of the UK lines of business. It differs from operating profit due to the exclusion of indirect expenses, such as overheads, and capital management. Profit contribution in 2012 excludes £96m benefit from the professional indemnity insurance claim and 2011 excludes £64m benefit from the UK staff pension scheme.

EEV operating profit

UK and Europe EEV operating profit before tax increased by 36% to £840m (2011: £617m) including the positive result of management actions taken to reduce the risk exposures of the UK business. These management actions include asset strategy changes and modelling improvements, which have resulted in lower burnthrough costs and higher profits on annuities. The result also included the £96m benefit from the professional indemnity insurance claim.

Operating return on equity

UK and Europe operating return on equity increased by 12.2% points to 27.8%, reflecting a 68% increase in operating profit after tax to £402m (2011: £240m). The total UK and Europe operating return on equity includes a return of 32.5% for the UK business and 6.0% for the Europe business. In addition to the increase in operating profit before tax, the operating return on equity benefited from a release of deferred taxation due to a change in the regulatory valuation of the UK staff pension scheme and the transition to the new UK insurance tax regime.

Assets under administration and net flows

	Net flows		AUA
	2012	2011	2012	2011
	£m	£m	£bn	£bn
UK retail - new	2,753	3,593	28.7	23.7
UK retail - old	(3,057)	(2,807)	31.7	32.1
UK retail fee based business	(304)	786	60.4	55.8
UK corporate	1,224	2,024	24.5	22.0
UK retail and corporate fee based business	920	2,810	84.9	77.8
UK institutional pensions	1,832	1,414	21.3	17.5
UK conventional with profits	(1,447)	(1,448)	4.1	5.3
Europe fee based	701	768	10.8	9.3
Total fee based business	2,006	3,544	121.1	109.9
UK spread/risk	(530)	(651)	15.3	14.4
Europe spread/risk	9	(10)	0.5	0.5
Assets not backing products	-	-	6.5	7.0
Total UK and Europe	1,485	2,883	143.4	131.8

UK and Europe AUA grew by £11.6bn to £143.4bn in 2012. Fee based business AUA, which accounts for 84% of total AUA, increased by 10% to £121.1bn reflecting a combination of net inflows and positive market movements.

In the UK, net inflows into our new style retail propositions of £2.8bn (2011: £3.6bn), reflected robust gross inflows of £5.2bn (2011: £5.7bn). This was despite a backdrop of subdued consumer sentiment, ongoing economic uncertainty and increased commission-based competition prior to RDR.

Retention in our older style UK retail business has been encouraging with net outflows of £3.1bn

(2011: £2.8bn) impacted by customers accelerating the purchase of annuities ahead of the implementation of the Gender Discrimination Directive on 21 December 2012. We continue to engage with customers with maturing policies who wish to continue to save or annuitise with us.

UK corporate pension net inflows, excluding trustee investment plan business of Standard Life Investments, of £1.2bn (2011: £2.0bn) demonstrate the strength of our corporate business at a time when employers were delaying decision making ahead of the phased introduction of auto enrolment. Net inflows into institutional pensions grew by 30% in the year to £1.8bn (2011: £1.4bn).

UK spread/risk business AUA increased to £15.3bn, as the positive impact of falling yields on debt securities was partially offset by overall net outflows driven by scheduled annuity payments. Gross inflows into annuities were 38% higher at £632m (2011: £459m) reflecting the success of our ongoing customer engagement programme which has helped to increase both the number of customers who choose to annuitise with us and the average annuity premium.

In our Europe business, fee based AUA grew by 16% to £10.8bn, driven by net inflows and favourable market movements. Net inflows decreased to £701m (2011: £768m) with higher redemptions in our German business reflecting economic uncertainty and lower consumer confidence.

New business performance

Total PVNBP sales of £14,167m (2011: £15,105m) were resilient against a backdrop of subdued consumer sentiment and ongoing economic uncertainty. Sales of corporate pensions have also been impacted by employers delaying decision-making prior to the phased introduction of auto enrolment and the last opportunity for some providers to secure business on a commission basis ahead of the implementation of RDR.

Delivering on our strategy

Our ability to maintain strong positions in each of our chosen markets is a testament to the significant effort and investment we have made, positioning ourselves across the value chain to provide market-leading solutions that meet the changing needs of our customers and their advisers.

We are in a unique position to support retail and corporate customers from the start of their investment journey to the end. This can be seen through:

· Support that Focus Solutions gives IFAs and large financial institutions in bringing them closer to their customers

· Business advice offered by threesixty in helping advisers deal with various aspects of compliance and creating RDR ready business models that will secure their long-term future

· Reliance that our customers can place on our Wrap platform giving advisers more time to focus on what really matters - their customers

· Comprehensive corporate offering catering to the varying needs of employers

· Retail and corporate investment solutions provided by Standard Life Investments via funds such as MyFolio, or by our discretionary fund manager, Standard Life Wealth

Our business is well positioned to benefit from market and regulatory changes ahead while technology, including our market-leading platform propositions, remains a key enabler for delivering lower unit costs which will allow us to realise the full potential of our scalable business model.

Our business model

Maximising revenue

Our business continues to benefit from our expertise across the value chain as we embed our wider investment solutions across our customer base:

· Our MyFolio risk based funds range, managed by Standard Life Investments, help make investing in funds simpler for our customers and has now attracted AUA of £2.2bn (2011: £0.9bn) and secured additional investment management margin for the Group

· In 2012, Standard Life Wealth was recognised as the fastest growing provider of discretionary investment management services in the UK and continues to show strong rates of organic growth, building a strong presence in the IFA market with assets on our higher margin propositions doubling over the last 12 months to £1.8bn. In February 2013, we entered into an agreement with Newton Management Limited to acquire its private client discretionary investment management division. This is expected to increase AUA by approximately £3.6bn and further accelerate growth of our discretionary investment management business.

· We have launched a suite of investment solutions for employers, building on the retail MyFolio proposition and expanding the MyFolio distribution into Ireland

· Our Passive Plus corporate investment solution has been chosen by the Independent Trustees as the default fund option for our newly launched Master Trust, and is being increasingly adopted across our growing pipeline of secured corporate business

· The successful launch of the Maxxellence Invest product in Germany has increased our share of the unit linked market

Increasing assets

Our retail business continues to grow, strengthening relationships with both new-model advisers and our direct customers:

· The number of adviser firms on our Wrap platform has increased by 14% to 1,137 firms and we continue to embed our Wrap platform with existing adviser firms

· By implementing adviser charging in October 2012 we ensured a smooth transition to RDR for our customers and their advisers and are positioned well to provide platform and risk based investment solutions to our customers, banks and other financial institutions

· Our recently announced agreement with the RBS Group will give RBS, NatWest and Ulster Bank private banking customers access via Wrap to a range of risk-based investment solutions managed by Standard Life Investments

· Our SIPP proposition continues to grow with an 18% increase in customers and AUA up 17% to £19.6bn (2011: £16.8bn)

Our corporate pension business continues to maintain momentum through its leading workplace savings solutions and by its strong links and existing relationships with corporate benefit consultants and employers:

· We won 137 new schemes (2011: 167 new schemes), securing a further 118,500 new employees in the year

· New schemes secured in 2012 included our first major Master Trust scheme which will result in an additional 24,000 members

· The phased introduction of auto enrolment is leading many employers to review their overall pension provision giving rise to higher levels of enquiries from employers and a growing pipeline of business in our target market

· We expect the introduction of auto enrolment to increase levels of employee participation in the 35,000 schemes we administer for our clients, resulting in 400,000 potential additional savers

Lowering unit costs

The inherent scalability of our business and extensive use of technology continue to be the key enablers in delivering lower unit costs. Initiatives undertaken to manage the acquisition and maintenance expenses of our business are now showing results:

· Acquisition expenses in the UK expressed as a proportion of PVNBP reduced to 133bps (2011: 144bps) as improvements in efficiency and absolute reductions in costs more than offset the impact of lower sales caused by the subdued economic conditions

· Maintenance expenses in the UK expressed as a proportion of average AUA reduced to 31bps (2011: 34bps). This reflected the scalability of our operations, improving efficiency of our processes and ongoing focus on cost control.

· The continued shift of customer interaction towards online and self servicing has helped to reduce our customer service full-time equivalent employees by approximately 20% since the start of 2010

1.4 Business segment performance continued

1.4.2 Standard Life Investments

Financial highlights

	2012	2011	Movement
Operating profit before tax	£145m	£125m	16%
Operating return on equity	52.0%	42.7%	9.3% points
Earnings before interest and tax (EBIT)¹	£145m	£126m	15%
EBIT margin¹	36%	34%	2% points
Third party assets under management (AUM)	£83.0bn	£71.8bn	16%
Total assets under management	£167.7bn	£154.9bn	8%
Third party net inflows	£6.1bn	£4.3bn	42%

¹EBIT and EBIT margin are key performance metrics for the investment management industry.

Standard Life Investments delivered strong investment performance in 2012 and maintained its robust long-term performance track record. It generated excellent growth in assets, particularly into higher margin propositions. Third party AUM increased to £83.0bn (2011: £71.8bn). Total third party net inflows were £6.1bn (2011: £4.3bn) and included the impact of a significant, and expected, outflow of £1.8bn from a single low revenue yield mandate following a change in the client's pension scheme strategy. Excluding this outflow, third party net inflows accelerated by 84% to £7.9bn (2011: £4.3bn) representing 11% of opening third party AUM. Growth in AUM together with a shift to higher margin products drove an 11% increase in fee based revenue to £408m. Excluding a fee received in 2011 for the transfer of money market funds, revenue increased by 13%, EBIT by 22% to £145m, and EBIT margin by 3% points to 36%.

HDFC Asset Management, our associate business, remains the largest mutual fund provider in India and contributed £18m

(2011: £15m) to EBIT. This is included in our results on a pre-tax basis for the first time.

Our 'Focus on Change' investment philosophy continues to drive the investment process that in 2012 delivered another year of strong performance with all funds ahead of benchmark. We also continued to take a leading role in governance and stewardship. Strong corporate governance along with responsible stewardship of a business' assets, employees, customers and environment have a fundamental impact on long-term investment returns. During 2012, we voted on 2,066 shareholder meetings and undertook 654 environmental, social and governance engagements, promoting high standards of governance and stewardship.

Market update

Despite some volatile market conditions in the first half of the year and significant macro-economic headwinds, the second half of 2012 saw improved investor confidence and increased risk appetite. Markets were assisted by action from global policy makers who undertook further quantitative easing in the UK and US, loosened monetary policy in China and Japan and supported debt issued by members of the Eurozone through the European Central Bank.

Equity markets responded positively and the FTSE All-Share Index increased by 8% during the year. However, the average daily values increased by just 1% compared to 2011. Flows across the industry tended to lag behind market sentiment improving towards the final quarter of the year as flows started to shift away from debt securities into equities.

Standard Life Investments had a very successful year against this backdrop, attracting flows mainly into higher margin products by providing investment solutions that satisfy changing client risk appetites.

Profitability

Operating profit before tax

	2012	2011
	£m	£m
Fee based revenue	408	368
Maintenance expenses	(281)	(258)
Share of joint ventures' and associates' profit before tax	18	15
Standard Life Investments operating profit before tax	145	125
Interest and exchange rate movements	-	1
Earnings before interest and tax (EBIT)	145	126

Operating profit before tax increased by 16% to £145m. Revenue rose by 11% reflecting both the increased assets under management and the shift in mix towards higher margin products such as UK mutual funds and multi-asset investment solutions. The mix effect helped to increase the revenue yield on third party AUM to 40bps (2011: 37bps). The increase in expenses to £281m reflected the continued global expansion of our business. The inclusion of our share of profit of HDFC Asset Management on a pre-tax basis for the first time contributed £5m to the increase in operating profit before tax.

Operating return on equity

Operating return on equity increased to 52.0% (2011: 42.7%), reflecting the increased profitability of our business.

Investment performance

We continued to deliver strong investment performance over all key time periods with the money weighted average for third party assets well above median over three, five and ten years. Also, over the one year time period 91% of funds outperformed their benchmark. Our suite of multi-asset funds outperformed their cash benchmark over all key time periods since inception. In addition, the strength of our mutual funds proposition is demonstrated by two of our funds being in the top three best performing in 2012 across 2,883 open ended investment funds available in the UK and the proportion of eligible and actively managed funds

(34 out of 44) rated 'Silver' or above by Standard & Poor's.

Assets under management and net flows

We remain focused on meeting the needs of existing clients and securing new business backed by consistently strong investment performance, ongoing product innovation, high levels of client service and an expanding global distribution capability. Third party net inflows increased by 84% to £7.9bn (2011: £4.3bn), after excluding the outflow of £1.8bn relating to the expected loss of a single low revenue yield mandate following a client's change of pension scheme strategy. Adjusted third party net inflows represent 11% of opening third party AUM and continued our unbroken record of positive annual net inflows since inception.

Our retention rates were some of the highest in the industry, with redemptions excluding the specific outflow referred to above at just 14% of opening AUM.

Third party AUM increased to a record £83.0bn (2011: £71.8bn) representing 49% of total AUM (2011: 46%). In-house AUM increased to £84.7bn (2011: £83.1bn) with favourable market movements more than offsetting scheduled outflows from the with profits business. As a result, total AUM reached a record £167.7bn (2011: £154.9bn).

Inflows during 2012 reflected the diverse nature of our product offering, our expanding global distribution capability and the increasingly international nature of our client base. In the UK and Europe we increased the institutional client base by 5%, while our success in the US in securing both significant institutional mandates from our expanded Boston office and wholesale distribution through the John Hancock platform resulted in net inflows increasing to £1.8bn (2011: £0.1bn).

Our UK wholesale retail business continued to perform well throughout 2012, despite some volatile market conditions. Net inflows into our range of UK mutual funds were up 56% to £2.5bn

(2011: £1.6bn) and represented our highest ever market share of 4.7% (2011: 3.8%).

Our pipeline of institutional business remains strong with fixed income, real estate and multi-asset propositions continuing to attract a lot of interest, increasingly from outside the UK. There is also positive demand for our mutual funds in the UK and for our SICAV funds in continental Europe.

Delivering on our strategy

We remain very well positioned for ongoing profitable growth, increasing our global presence and expertise across a range of asset classes, diversifying our sources of revenue both geographically and by product category. At the same time we are delivering consistently strong investment performance.

During 2012 we further expanded our product range, with developments in alternative, multi-asset and emerging market products being of particular note. We also broadened the geographical diversity of our AUM with 62% (£3.8bn) of third party net inflows coming from outside the UK, including £1.8bn from the US.

We will continue to leverage our investment expertise to ensure we maximise the share of the value chain we can capture for the Group and continue to work closely with our strategic partners including Sumitomo Mitsui in Japan, HDFC in India and John Hancock in the US, while exploring and capitalising on further opportunities for growth elsewhere.

1.4 Business segment performance continued

1.4.2 Standard Life Investments continued

Our business model

Maximising revenue

· Sales of higher margin products resulted in an increase in the revenue yield on third party gross sales to 52bps (2011: 46bps) whilst the average revenue yield on overall third party assets increased to 40bps (2011: 37bps)

· Expanded our range of higher margin propositions including our global emerging markets capability through the launch of Global Emerging Markets Unconstrained SICAV, Global Emerging Markets Equity fund and the launch of an emerging markets debt fund and alternative capabilities in areas such as private equity and real estate

· Continue to collaborate across the Standard Life Group to maximise the Group's share of the value chain, for example our range of risk based funds is an integral part of a major distribution agreement secured with the RBS Group

Increasing assets

· Achieved record third party AUM of £83.0bn driven by a 42% increase in third party net inflows to £6.1bn, or 84%, excluding the £1.8bn outflow following a client's change in pension scheme strategy

· Our share of the wholesale market in the UK continues to grow increasing to 4.7% (2011: 3.8%), withUK mutual funds AUM now exceeding £13bn, representing 17% of third party assets

· Our market-leading range of MyFolio risk based funds, used extensively within our long-term savings and investments business, continues to be very popular with AUM of approximately £2.2bn

· Strong pipeline of new investment initiatives which positions us well to continue to meet the changing demands of our clients through new and innovative investment solutions

Lowering unit costs

· Maintenance expenses expressed as a proportion of average AUM remained unchanged at 17bps despite ongoing development of our investment capability and expanding distribution and geographic reach

· Ongoing control over costs, combined with expansion in revenue margins, has resulted in a 14% compound annual growth in EBIT over the last five years

1.4.3 Canada

Financial highlights

	2012	2011	Movement
Operating profit before tax	£355m	£187m	90%
Operating return on equity	24.7%	14.6%	10.1% points
Assets under administration	£27.8bn	£26.1bn	7%
Net flows	£407m	£253m	61%
EEV operating profit before tax	£317m	£324m	(2%)

Market update

Persistently low interest rates have significantly impacted the financial industry in Canada. This trend, together with changing demographics, increased personal debt and falling birth rates has emphasised the need for individuals to properly prepare and plan for their pension and retirement needs. We are well placed to take advantage of this evolving market environment, building on our demonstrated strengths in pensions and long-term savings and investments.

The shifting demographics in Canada have translated into a growing number of customers drawing down their assets. These clients were historically underserved by the financial industry whose focus had been the accumulation target market, particularly in the corporate pension market. As the 4th largest defined contribution provider in Canada we have worked closely with employers and employees to understand their needs and implement retirement transition services and solutions that will enable us to retain pension plan participants after retirement.

Low pension coverage and savings rates, coupled with an ageing population has led the Canadian government to introduce legislation aimed at increasing pension coverage, especially for employees of small and medium enterprises. Together with other industry groups, we have increased our efforts to encourage legislators to enact this new pension plan into law. In the meantime, we have developed our Pooled Registered Pension Plans solution and other solutions aimed at smaller plan sponsors.

The macro-economic environment has pushed consumers to a more conservative risk profile, with important assets held in

short-term saving vehicles and fixed income funds. Given our strength in income oriented funds, we benefited from this behaviour. The volatile market environment along with increased pressure on capital management has led to changes in the insurance market, as life insurers moved away from capital intensive products. We are in a favourable position to take advantage of the evolving market by building on our strengths in long-term savings and investments propositions.

Profitability

Operating profit before tax

	2012	2011
	£m	£m
Fee based revenue	172	166
Spread/risk margin	393	281
Total income	565	447
Acquisition expenses	(79)	(78)
Maintenance expenses	(240)	(220)
Capital management	109	38
Canada operating profit before tax	355	187

Operating profit before tax increased to £355m (2011: £187m) and included the impact of previously announced management actions.

The key highlights are:

· Fee based revenue increased by £6m mainly due to higher average AUA

· Spread/risk margin benefited from various management actions undertaken to increase profitability and de-risk our balance sheet, which more than offset the effects of the low interest rate environment. Management actions generated a total margin of £109m (2011: £88m). This included a gain of £81m from the reduction in actuarial liabilities arising from the property sales and the renegotiation of an existing reinsurance arrangement. This is in addition to the profit from the sale of properties of £72m included within capital management. Other management actions enhancing the investment yields on assets contributed £28m. One-off reserving changes generated a gain of £91m (2011: loss £57m), and included favourable changes in mortality assumptions and revised investment allocations in line with the long-term asset strategy.

· Acquisition expenses increased due to higher level of product and technology development spend and higher sales volumes

· Maintenance expenses increased by £20m, mainly due to the rise in AUA and the associated costs incurred to service and administer these assets. Maintenance expenses were also impacted by increased development spend. Maintenance expenses, as a proportion of average AUA, increased to 95bps (2011: 92bps).

· Capital management increased by £71m due to the £72m gains on property sales in H2 2012. These transactions demonstrate our focus on maximising shareholder value and also reduced our exposure to the property asset class.

1.4 Business segment performance continued

1.4.3 Canada continued

EEV operating profit

EEV operating profit before tax decreased by 2% in constant currency to £317m (2011: £324m) due to lower new business contribution, with margins adversely impacted by the low interest rate environment. This was partially offset by higher back book results which included the benefit of property disposals and modelling changes.

Operating return on equity

Operating return on equity increased to 24.7% (2011: 14.6%) consistent with higher operating profit. We continue to manage our capital position to generate sustainable returns and to maintain appropriate levels of regulatory capital.

Assets under administration and net flows

AUA increased by £1.7bn to £27.8bn and net inflows increased by 61% in constant currency to £407m (2011: £253m).

Fee business AUA increased by 14% in constant currency to £15.9bn. This was driven by net inflows in group and individual segregated funds and positive market movements. Total net inflows from fee based business increased to £815m (2011: £618m). Group savings and retirement fee business net flows of £500m were 5% lower than 2011 in constant currency. Individual savings and retirement fee business net flows increased to £331m (2011: £199m), as a result of higher gross inflows in our retail segregated funds which increased by 24% in constant currency. Mutual funds net outflows improved to £16m (2011: £111m), with gross inflows rising by 27% in constant currency. Fee business gross flows were driven by strong new business performance, especially in retail.

Spread/risk AUA decreased to £9.9bn mainly due to lower gross inflows into term funds and annuities.

New business performance

PVNBP sales increased by 23% in constant currency to £3,584m (2011: £2,928m). This was led by group savings and retirement sales, which increased by 67% in constant currency due to our success in securing regular premium group business and also the impact of lower discount rates.

Excluding discontinued life insurance sales, retail sales increased by 13% in constant currency. In April 2012, we suspended new sales of the Ideal Income Series, our Guaranteed Lifetime Withdrawal Benefit product, in light of capital requirements and the low interest rate environment.

Delivering on our strategy

Our strategy is to differentiate our business by providing innovative retirement and investment solutions combined with a world-class customer experience. We launched our 'In the journey together' advertising campaign, showing customers that we understand their priorities and are confident we can offer value-added propositions throughout their journey with us.

We will deliver this strategy through:

· New CEO and renewed management team to drive improved performance as we focus on our expertise and opportunities in long-term savings and investments

· Top-ranked retail sales team in the market providing advisors with solutions and tools to bring them closer to their customers

· Comprehensive group savings and retirement offering catering to the varying needs of employers and helping plan members address their retirement needs

We will continue to leverage the strength of our customer solutions to sustain sales momentum in 2013, which marks our 180th anniversary in Canada. We are poised to take advantage of future market opportunities driven by evolving demographics, customer preferences and regulatory change.

Our business model

Maximising revenue

· The average revenue yield on our fee business decreased to 113bps (2011: 117bps), reflecting pricing conditions prevailing in our markets and also business mix

· The spread/risk margin reflects a range of management actions taken during the past year to improve the risk profile of our business while having a positive impact on both capital and operating profit. We have continued to de-risk the business and lowered future earnings sensitivity to market movements.

Increasing assets

· In our group savings and retirement line, we continue to develop and promote comprehensive strategic asset allocation options. Examples include the launch of target date funds, revamping our Avenue portfolio product and adding funds to our Quality & Choice Investment Program platform. We introduced a dedicated relationship team for our corporate customers and created a planning tool for plan members nearing retirement, with the aim of retaining and increasing AUA by providing customers with comprehensive tools and solutions to help them assess and meet their financial needs upon retirement.

· In our retail mutual funds line, we launched two new fixed income mutual funds, aimed at customers wanting to avoid low interest rates and high market volatility. We enhanced our segregated funds offering by launching our Signature 2.0 series, presenting investors with more options to adapt their portfolios to evolving market conditions.

· The strength of our retail sales force and adviser relationships, along with our enhanced investment fund offering led to improved sales and increased market share based on assets under management in our retail segregated funds

· We launched Advisor Portal, our dedicated adviser website for all lines of business to better meet the needs of our advisers by offering them a single point of entry for information on all of our products and services and facilitating access to timely and relevant content to help them grow their business

Lowering unit costs

Acquisition expenses as a proportion of PVNBP sales decreased to 220bps (2011: 266bps), driven by strong sales growth.Overall maintenance costs, as a proportion of average AUA increased to 95bps (2011: 92bps) reflecting increased development spend.

1.4 Business segment performance continued

1.4.4 Asia and Emerging Markets

Financial highlights - wholly owned

	2012	2011	Movement
Operating loss before tax	(£3m)	(£8m)	63%
Operating return on equity	0.0%	(6.1%)	6.1% points
Assets under administration	£3.3bn	£2.5bn	32%
Net flows	£0.6bn	£0.7bn	(14%)
EEV covered business operating (loss)/profit before tax	(£4m)	£9m	(144%)
EEV non-covered business operating loss before tax	(£13m)	(£8m)	(63%)

Financial highlights - joint ventures (Standard Life's share)

	2012	2011	Movement
Operating profit before tax	£8m	£2m	300%
Operating return on equity	7.9%	2.8%	5.1% points
Assets under administration	£1.5bn	£1.2bn	25%
Net flows	£0.2bn	£0.3bn	(33%)
EEV covered business operating profit before tax	£18m	£5m	260%

Market update

Our Asia and Emerging Markets business consists of wholly owned operations in Hong Kong, an offshore business based in Ireland, our newly created branches in Singapore and Dubai, and insurance joint ventures in India and China. Operating across a number of territories the business is subject to different market dynamics:

· The long-term savings and investments market in Hong Kong remained competitive. Our business delivered good performance, continuing to attract business from higher net worth customers resident in Hong Kong and the wider region, increasing our position in the market.

· The market disruption caused by the implementation of the RDR and increased competition from commission payers impacted the UK offshore bond market in which Standard Life International, our offshore business, operates. Our International bond proposition continued to perform well, gaining market share and winning a number of awards.

· In India, economic growth continued to slow, however at 5% of GDP it remains high by Western standards. While consumer sentiment remains subdued, many market commentators are expecting a pick up in growth in 2013. Penetration of insurance and savings products in India remains low. This provides our joint venture HDFC Life with an opportunity to continue to build on its record of growth, capitalising on its number two position in the private market in what has been a challenging regulatory environment.

· The Chinese economy remained affected by contraction in global demand for its products amongst Western economies. The insurance market continued to grow at a moderate rate with domestic players dominating. Our joint venture, Heng An Standard Life, increased market share in the foreign joint venture market, continuing to expand its distribution capability.

Profitability

Operating profit/(loss) before tax

Operating profit/(loss) before tax	2012	2011
	£m	£m
Fee based revenue	54	45
Acquisition expenses	(11)	(21)
Maintenance expenses	(46)	(32)
Total wholly owned	(3)	(8)
India and China JV businesses	8	2
Asia and Emerging Markets operating profit/(loss) before tax	5	(6)

Operating profit before tax increased to £5m driven by further progress in the wholly owned and joint venture businesses. The key highlights are:

· Operating loss before tax of the wholly owned businesses reduced to £3m due to growth in revenue

· Fee based revenueincreased by 19% in constant currency resulting from a growing asset base

· Total expenses increased by 7% in constant currency to £57m reflecting the increased investment in development of new propositions including the expansion of our business into new regions through the opening of branches in Singapore and Dubai

· The joint venture businesses delivered an operating profit before tax of £8m (2011: £2m). This reflects the progress made by HDFC Life, in creating a leading and profitable insurance business in India which continues to grow its market share while improving its efficiency.

EEV operating profit

Total EEV operating profit decreased to £1m from a profit of £6m in 2011. The wholly owned businesses recorded a total EEV operating loss of £17m (2011: profit £1m). The result was negatively impacted by lower new business sales, higher levels of investment as a result of expansion of our operations into new markets and adverse persistency experience in our Hong Kong business which was caused by lower investor confidence. EEV operating profit in our joint venture businesses increased to £18m (2011: £5m) due to improved new business profitability and cost control.

Operating return on equity

Operating return on equity for our total Asia and Emerging Markets operations increased to 4.0% (2011: negative return of 1.4%) driven by higher operating profit after tax and also the benefit of our Indian joint venture becoming capital self sufficient.

Assets under administration and net flows

AUA in the wholly owned businesses grew by 32% to £3.3bn (2011: £2.5bn) driven by robust net flows, representing 24% of opening AUA and favourable market and other movements.

Net flows in the wholly owned businesses were lower at £0.6bn (2011: £0.7bn) reflecting cautious consumer sentiment across the markets we operate in and also disruption ahead of the implementation of the RDR in the UK.

AUA in the joint venture businesses increased by 25% to £1.5bn (2011: £1.2bn) mainly due to net inflows of £0.2bn (2011: £0.3bn).

New business performance

PVNBP sales in the wholly owned businesses decreased by 16% in constant currency to £1,020m (2011: £1,205m), with a fall in both Hong Kong and UK offshore sales. In India, sales rose 19% in constant currency to £435m (2011: £414m) as HDFC Life increased its share of the individual private market to 17% (2011: 15%) by continuing to capitalise on the strength of its brand, distribution relationships and ability to respond to changing customer needs. In China, sales remained broadly stable at £87m (2011: £86m), with Heng An Standard Life increasing market share in the individual and bank channels in the foreign joint venture segment of the market.

Delivering on our strategy

Our business is focused on delivering profitable growth both from our existing operations as well as by extending our reach to attractive international and offshore wealth management markets, where we are well placed to leverage our existing offshore capability. Our increased focus on Asia is gaining traction, leading to further expansion of our retail investments business. In October 2012 we announced that we had established a branch in Singapore. Singapore is one of the top four financial centres globally and provides us with a significant and fast growing opportunity to access the South East Asia market. In November 2012, we announced the launch of our first office in Dubai, further broadening our international footprint in a high growth, high value emerging market.

We also aim to deliver profitable growth through maximising the value of our existing business in Hong Kong and also through developing our joint ventures. Our joint ventures in India and China continue to improve their financial performance and have gained market share. HDFC Life is well positioned to take advantage of the market opportunity and continues to be one of the leading private life insurance businesses in India.

Our business model

Maximising revenue

· Revenue increased by 19% in constant currency, with the average revenue yield on fee based business of 189bps (2011: 205bps) reflecting fast growth in assets combined with changes in business mix

· We are operating across the value chain by offering Standard Life Investment solutions including GARS and MyFolio on our International Bond, and exploring further opportunities for greater collaboration with Standard Life Investments in Asia

Increasing assets

· We continue to offer propositions that help our customers invest in volatile market conditions. In Hong Kong we launched Harvest Wealth to cater to the needs of internationally mobile clients while our offshore business in Ireland launched RDR compliant versions of our propositions to access the opportunities created through this regulatory change.

· Our offering continues to be developed to provide customers, and their intermediaries, propositions which fully address customers' needs. Our support to advisers and customers, along with our UK offshore proposition, were recognised at the International Adviser Awards during the year.

· We also opened new branches in Singapore and Dubai which will broaden our reach and provide access to new regional markets and customer segments

· In India, HDFC Life was the first private life insurer to launch unit linked pension plans under the new regulatory regime. Additionally, several new products were launched in 2012 including Immediate Annuity, Smart Woman and Health Assure Plan. Sales of online term product Click2Protect also continued to grow.

Lowering unit costs

· Total expenses increased to £57m (2011: £53m), reflecting the additional investment in our businesses and initial start-up costs associated with expanding our operations into Singapore and Dubai

· We continue in our efforts to drive efficiencies across all of the territories that we operate in and expect to benefit in the longer term by developing a scalable business

1.5 Risk management

Risk management is an integral part of the Group's corporate agenda. Our risk management strategy is to manage long-term value creation, cashflow and risk in a holistic manner in order to make informed decisions to create and protect value in the Group's activities. We are proactive in managing and understanding the risks to our objectives at every level of the Group and ensuring capital is delivered to areas where most value can be created for the risks taken. Find out more on the main risks we face below.

	Market risk	Credit risk
Definition	The risk that arises from the Group's exposure to market movements which could result in the value of income, or the value of financial assets and liabilities, or the cash flows relating to these, fluctuating by differing amounts.	The risk of exposure to loss if a counterparty fails to perform its financial obligation, including failure to perform those obligations in a timely manner. It also includes the risk of a reduction in the value of assets due to a widening of mortgage, bond and swap spreads.
Appetite	The Group has no appetite for market risk exposures except where they arise as a consequence of core strategic activity. Business units are expected to limit market risk exposures by matching the features of liabilities to features of assets. Exposures may be incurred where there is an overriding business need and specific appetites will be established as necessary.	The Group has an appetite for credit risk to the extent that acceptance of this risk optimises the Group risk-adjusted return. However, the Group has limited appetite for significant losses arising from counterparty failures and maintains robust risk limits which Group companies must adhere to.
Main sources of risk	Equity and property risk · Changes in the value of future profits earned on unit linked funds and collective investment schemes where the funds are invested in equities and property · Burnthrough from the Heritage With Profits Fund (HWPF) and German With Profits Fund · Guarantees on segregated fund business in Canada Fixed interest risk · Changes in the value of future profits earned on unit linked funds and collective investment schemes where the underlying funds are invested in fixed interest assets · Burnthrough from the HWPF and German With Profits Fund · Insufficient long-dated fixed income assets to match the longest dated liabilities in Canada Currency risk · Exchange rate movements that reduce the value of overseas operations and profits generated by them · Changes in the value of future profits on unit linked funds and collective investment schemes where the underlying funds are invested in overseas assets	The Group is exposed to credit risk through: · Changes in the value of future profits earned on unit linked funds and collective investment schemes where the underlying funds are invested in corporate bonds · Burnthrough from the HWPF Credit risk also results from holding the following assets: · Corporate bonds held to back annuities written by SLAL post-demutualisation · Assets held to back the subordinated debt in SLAL, a proportion of which are asset backed securities that are held for historical reasons · Corporate bonds and commercial mortgages held in Canada to back annuities Other holdings of cash and cash equivalents, debt securities and the reinsurance of certain insurance liabilities to reinsurance counterparties also results in credit risk.
2012 summary	Concerns about sovereign debt levels in certain Eurozone countries have persisted leading to increased demand for safe haven assets. As a result, UK, German and Canadian yields have been low and are expected to remain low. In managing our market risks we have: · Undertaken further hedging to reduce our exposure to falling Euro yields · Taken advantage of market conditions to reduce our property exposure in Canada · Continued the dynamic hedging of guarantees provided for Canadian Segregated Funds · Monitored and managed the equity backing ratio of assets held within the HWPF · Reviewed and affirmed our hedging strategy in respect of the currency risk arising from our overseas operations	Credit concerns regarding debt issued by certain European sovereign states and banks have continued throughout 2012. We have responded to these concerns by: · Maintaining benchmarks for our fixed interest portfolios which exclude holdings in peripheral sovereign debt · Restricting holdings of cash and cash equivalents to banking counterparties that we assess to be of appropriate credit standing, taking into consideration both direct and indirect factors such as the potential impact of contagion risk on these banks We have introduced changes in our internal model for assessing the financial strength of banking counterparties to ensure we are aligned with the market's reduced expectations of state support. We have also continued to monitor potential downgrades of the UK sovereign by external rating agencies.

	Demographic and expense risk	Liquidity risk	Operational and strategic risk
Definition	The risk that arises from the inherent uncertainties as to the occurrence, amount and timing of future cash flows due to demographic and expense experience differing from that expected. This includes liabilities of insurance and investment contracts.	The risk that the Group is unable to realise investments and other assets in order to settle its financial obligations when they fall due, or can do so only at excessive cost.	Operational risk is the risk of adverse consequences for the Group's business, resulting from inadequate or failed internal processes, people or systems, or external events. Strategic risk is the risk associated with the robustness of the planning process and threats to achieving our strategy.
Appetite	The Group has an appetite for such risks since we expect acceptance of the risk to be value additive. Appetites will be established to reflect planned business activities in line with the Group's overall strategic objectives.	The Group has no appetite to fail to meet its liabilities as they fall due.	The Group has an appetite for operational risks where exposures arise due to core strategic activity. However, the Group will seek to put effective controls in place to reduce operational risk exposures, except where the costs of such controls exceed the expected benefits.
Main sources of risk	Persistency · Changes in the value of future profits earned on unit linked funds and collective investment schemes in the UK and future recourse cash flow payments from the HWPF · Changes in the value of future profits earned in respect of Standard Life Investment's third party AUM and segregated fund business Longevity · Annuity contracts written by the UK and Canada where the current experience differs from that expected, more volatility of experience than expected, or the rate of improvement in mortality is greater than anticipated Expense · Changes in the value of future expected expenses · Shareholder is directly exposed to risk of expenses being above expectation	The Group is exposed to liquidity risk from the following sources: · The type of business that is written, the assets and liabilities arising from that business and how the assets are managed to meet those liabilities · Operational aspects of the business, for example the management of cash as it flows into our business as premiums and out of our business as claims and the payment of corporate cash flows including dividends, coupons and debt repayment · Potential liquidity issues in unit linked funds due to the underlying asset classes · The collateralisation of derivatives which results in cash volatility as the value of the derivative changes	The key operational and strategic themes affecting the Group are: · Ability to deliver the strategic plan · The significance of adverse global economic volatility · The impact of regulatory activity and change (e.g. RDR, Solvency 2) · Inadequate control environment internally and in relation to third parties · Potential Eurozone break up · Poor management of existing core processes · Potential loss of clients from adverse customer experiences · Ineffective arrangements with service providers and business partners · Ineffective management of information security · Insufficient capacity and capability to deliver change programmes and projects · Failure to attract, retain and develop talent ·
2012 summary	We continued to engage with advisers in the market to minimise the potential adverse impacts resulting from advisers seeking to move schemes in advance of RDR. We remain focused on developing propositions to increase the retention of funds when insurance and savings contracts reach maturity. We have continued to monitor emerging research into longevity, for example from the Office for National Statistics and the industry-wide Continuous Mortality Investigation, in order to inform our in-house view of likely future improvements in life expectancy. We have renegotiated the terms of certain reinsurance arrangements in Canada to assist with the management of our longevity risk.	We have continued to monitor the liquidity for various asset classes particularly in the context of developments in the financial markets. We have also continued to: · Centrally co-ordinate strategic planning and funding requirements · Maintain a portfolio of (currently undrawn) committed bank facilities · Maintain our Euro Medium Term Note Programme During the year we issued CA$400m subordinated debenture notes and £500m fixed rate subordinated notes.	We have continued to work on implementing appropriate processes and controls to prepare for regulatory changes. Concerns regarding the Eurozone have continued to present pressures and challenges for various operating processes and systems during the year. However, the controls embedded within the Group have ensured we have been able to avoid any serious losses or adverse consequences. In light of the ongoing concerns regarding the Eurozone we have undertaken further development of our operational plans to ensure we are well placed to respond, if required, to an exit from the Eurozone of one or more sovereigns. We continue to monitor developments regarding the constitutional arrangements for the UK and Europe given the potential impact these could have on our business.

1.6 Our customers

Understanding our customers, their needs today and in the future, helps drive what we do. We're constantly looking at what our customers tell us to see where we can make improvements to the experience we give them.

Knowing our customers

During 2012, we have worked to understand more about the changing needs of our customers across all the markets where we operate. We continued to use a variety of methods including research with our online customer community and direct feedback at events hosted by our senior leaders. We also did research in the United States to understand other companies' approaches to meeting customer needs. The aim of this was to build a more comprehensive picture of our customers that we could use to drive improvements in the products and services we offer them.

Keeping up to date

There were some important regulatory changes in 2012, which affected customers, our adviser partners and the wider industry. Some of the detail was quite complex, but we produced a range of straightforward communications for customers that explained how the changes may affect them. We also continued to provide comprehensive support to our adviser partners and employers so that they are ready to support their clients and employees through these changes too.

Online and mobile technology developments mean customers have even more access to information. We responded to this by improving the websites and platforms our customers use to access their details and their feedback led to a number of improvements to how we do business online. We introduced apps that let our customers access their Standard Life products on their smartphone or tablet, as well as new educational videos covering topics like with profits.

We also launched a new customer blog in the UK. The 'MoneyPlus' blog offers helpful information and expert opinion on a wide range of financial topics like, investing, planning for the future and current events on subjects like pensions and taxation. We will continue to develop the digital services we offer so we can keep adapting to how our customers want us to work with them.

Treating Customers Fairly

In developing products and services for our customers, our senior leaders are committed to following the Financial Services Authority's Treating Customers Fairly principles. We treat these principles as a minimum requirement and continue to invest in improving our customer processes so that we can exceed these outcomes. This includes our new customer conduct policy which was introduced during 2012.

Satisfied customers

We have redesigned the way the Group is structured so that it better meets our customers' needs and helps us build better relationships with them. Details on our individual businesses are included below.

UK and Europe

Our new customer focused organisation aligns our structure and roles around our customer's needs. We monitor our customers' thoughts and views of the service we give and one of the most informative measures is when we gather feedback on our service levels straight after we have interacted with them. Our average rating for 2012 for customer satisfaction in the UK was 4.86 out of 5 (2011: 4.85) and for intermediary satisfaction it was 4.77 out of 5 (2011: 4.74).

In 2012, our UK and Europe business was recognised with awards, including:

· ‘Retirement Solutions Provider of the Year’ at the Money Marketing Awards

· ‘Bundled/Full Service Defined Contribution Provider of the Year’ at the Professional Pension Awards

· Gold award for Direct Marketing effectiveness at the Marketing Society Star Awards

· ‘European Pensions Communications Award’ at the European Pensions Awards

· Awarded two five-star ratings for both the full Bespoke Discretionary Service and Managed Portfolio Services by independent financial research company Defaqto

· Standard Life Wealth was recognised twice in Citywire’s ‘Top 100 Brightest Wealth Stars’ of 2012

Standard Life Investments

Our business remains committed to delivering strong investment performance, which we achieve through our 'focus on change' investment philosophy and high levels of client service. We monitor our clients' thoughts and views through our annual client survey. In 2012, 91% of our Institutional clients (2011: 84%) viewed us as a firm to be trusted and 85% (2011: N/A) perceived Standard Life Investments to be focused on long-term investing. High quality support by our client service teams, combined with strong investment performance from our fund management teams, has been recognised with many awards in 2012, including:

· Financial Adviser's special 'Best Investment Service Provider 1993-2011' award in recognition of long-term commitment to the IFA community over the last 19 years

· Our Global Absolute Return Strategies Fund winning the Absolute Return category at the Investment Week Fund Manager of the Year awards

· Standard Life Investments' Global Index Linked Bond Fund being highly commended in the global bond category of the Money Observer Fund Awards 2012

· Our UK Smaller Companies Fund and the Corporate Bond Fund making it on to S&P Capital IQ's winners list of the best funds with a decade-long track record

· John Hancock GARS fund was awarded the US rookie fund of the year in the Wall Street Journal

· Standard Life Investments collected the Investment Manager of the Year award at the Irish Pensions Awards

· A five-star award in the Investment category at the FTAdviser Online Service Awards, as voted for by IFAs, for the best website

Canada

We continue to invest in technology, training and processes to help us provide the level of service our customers need and expect. This includes continuing to improve how we do business with them online, making it easier for both sponsors and participants to administer our products.

Our customer focus has earned us a number of awards during 2012, including:

· Internet Advertising Competition award in the 'Best Mutual Fund Website' category from the Web Marketing Association, recognising Standard Life Mutual Funds' excellence in online advertising

· Environics Advisor Perception Study ranked Standard Life Canada first in adviser perception of segregated funds division, and second in adviser perception of overall company. We also ranked in the top three mutual fund wholesaling teams in Canada.

· Four Meritas socially responsible investment (SRI) funds offered to group savings and retirement clients or in retail segregated funds were among the Corporate Knights 2012 Responsible Investing Guide's top 10, recognising our fund performance and integration of SRI into the investment process. We are one of the few major insurers to offer SRIs in segregated funds, and the first to add SRI funds under managed portfolios in group savings and retirement plan offerings.

· IFCA Award of Excellence for the 2011/2012 RRSP Campaign for Group Savings and Retirement

· IFCA Honourable Mention for the 'Plan for life' advertising campaign to sponsors and advisers

Asia and Emerging Markets

In 2012, we actively managed our customer relationships and developed additional digital services which will add further customer value to our propositions.

All our operations in Asia and Emerging Markets are committed to maintaining the highest level of customer service. This commitment to customer service was acknowledged during 2012 with our businesses receiving three International Adviser Life Awards in 2012:

· 'Best for adviser/customer support' in the UK offshore category

· 'Best for adviser/customer support' in the Asia category, our first International Adviser award in Hong Kong

· 'Best regular premium investment product' in the UK offshore category for the recurrent single premium bond product

In addition, Standard Life Asia also won:

· Most Valuable Company award from MediaZone

· Outstanding achiever award in the ILAS provider category by Benchmark magazine

HDFC Life, our joint venture in India won various awards in 2012, including:

· 'Best Private Life Insurer' at CNBC TV18 Best Bank and Financial Institution Awards 2012

· For the second consecutive year, HDFC Life have received the Best Product Innovation Award at the Indian Insurance Awards 2012

· Golden Peacock Award for Product Innovation in 2012 awarded by Institute of Directors for 'Click2Buy' HDFC Life point of sales underwriting

1.7 Our people

We know how important our people are in helping achieve our vision and deliver on our strategy. We understand that highly engaged people are more productive and have a positive impact on profit and shareholder value. Our people have access to excellent development opportunities and we continue to use our employee insight to help us strengthen the relationship that each individual employee has with our business.

People strategy

Our people strategy covers four key themes:

· Strengthening our leadership - developing powerful, consistent leadership and identifying and growing tomorrow's leaders at all levels across the organisation

· Developing our organisational capability - building the people resources, capabilities and behaviours we need to support the business

· Transforming the way we work - designing and building an organisation that is fit for purpose and scalable for the future

· Building the environment we work in - defining and building the high performance culture we aspire to

Leadership and talent

We work to bring out the best in our people and enable everyone to fulfil their potential. Everyone is seen as talent and we understand the need to offer development and learning opportunities at all levels. To attract and retain the best talent for Standard Life, we appreciate the importance of providing great development and career opportunities for our people at all levels and across all geographic locations. With this in mind, the Group Development Framework was created to provide development experiences for people at all levels and up to the executive team level. Participation in the different elements is driven by business priorities and individual needs as agreed during performance and development conversations, which we encourage all our people to have.

Senior leadership group

Our aim is to have a sector leading leadership team. We continue to ensure all senior leaders have stretching and meaningful development plans. As a result, our succession cover for executive roles has been strengthened and we continue to increase the ratio of internal appointments into senior roles. We also provide access to external coaches and engage with accredited business schools on programmes which address development needs and business specific expertise. We also started to externally benchmark our top senior talent against the external market and will continue to do this in 2013.

Talent programmes

Our award-winning talent programmes for senior leaders, emerging leaders and graduates are part of our continued investment in creating strong leadership pipelines to support future growth. We work closely with external organisations, leveraging their skills and expertise in providing top class development for our best people.

Graduates

We have always recognised the importance of having a strong graduate programme and in 2012 we designed and launched our first group-wide graduate recruitment and development programme. The objectives of this programme are to increase the diversity of our graduates, provide a core development intervention and a single recruitment proposition. We will continue to recruit graduates across a number of different disciplines to provide a strong pipeline of talent.

Leadership development programme

One of our strategic priorities is to build leadership capability at all levels in the organisation. We have continued to run the Leadership Development Programme in 2012 which supports all our leaders in developing skills and greater self awareness to perform effectively within their current role. By the end of 2012, 700 people had taken part in our leadership development programmes.

Edinburgh Guarantee

We strongly believe that large organisations have a key role in addressing youth unemployment in the UK. We play a leading role in supporting the youth unemployment agenda in Edinburgh and have been working closely with Edinburgh council on offering work placements and skills development to school leavers, with 20 individuals taking part in 2012. The paid work placements provide work experience in teams across our business. Four interns secured permanent jobs and many others have had their contract extended and will be with us for longer. The programme includes structured development to help the young people build their skills and confidence and allows them the opportunity to work in teams across our business, getting real work experience which sets them up for their future career. We continue to build on this as part of our sustainability agenda and plan to recruit a further 32 individuals in 2013.

Engagement and well-being

Our employee survey measures how engaged our people are and how enabled they feel to do their job to the best of their ability. The results from this survey have helped us to agree three priority themes for improvement across the Group. These priority themes are called product advocacy, conditions in the job and performance management. Each theme was sponsored by a member of the Group executive team and specific actions have been taken to improve our engagement and enablement. 86% of our people completed the survey in 2012 and action planning on the results began in early 2013.

Well-being is a strategic priority and promoting a healthy work environment helps to encourage employee engagement. This leads to improved performance and better business results. We signed up for the 2012 Global Corporate Challenge, a 16 week healthy living and activity campaign. Over 2,000 employees from across the Group took part. At the end of the challenge, Standard Life was ranked 10th most active organisation globally out of the 1,200 that took part. In addition, all our businesses have clear wellbeing plans that include local activities to encourage healthy lifestyles.

Our performance culture

We reward our people when they perform well. We provide a reward framework that recognises excellent performance and provide choice and flexibility so our people can tailor their benefits package. We continued to embed a performance culture by making a clear link between performance and pay, built around our performance management framework. In 2012, we strengthened this message by introducing a flexible pay matrix to help with determining employees' salary awards. Salary awards are based on where an employee is positioned within their salary band and also on their performance rating. This provides a simple and transparent process which is easy to understand and enables us to continue building a strong performance culture that recognises and rewards high performance. We continue to ensure that performance becomes part of regular conversations between managers and employees across our business.

Diversity and inclusion

In 2012 we committed to a long-term Group diversity strategy with three themes called building awareness, attraction and development and retention. This strategy is aligned to our Group people strategy and reflects our values and what we stand for as an organisation. The diversity activities started in 2012 will contribute to the cultural shift in our working environment.

In 2012 the Women's Development Network was launched to employees in the UK. The network has grown in membership to over 350 people, running 11 development events since April 2012. The network has been directly supported by a number of our most senior leaders.

The diversity of our Board continues to demonstrate good practice. We have good representation of Board members from different nationalities and our gender representation is high. We were cited seventh of the FTSE 100 companies for gender representation in 2012. There are currently four women on our Board out of 12.

1.8 Basis of preparation

Overview

Our Business review for the year to 31 December 2012 has been prepared in line with the Companies Act 2006 and the Disclosure and Transparency Rules (DTR) issued by the Financial Services Authority (FSA). Under section 417 of the Companies Act 2006, DTR 4.1.8 and DTR 4.1.9, the Group is required to provide a fair review of the business and a description of the principal risks and uncertainties facing the Group. Principal uncertainties are detailed in Section 1.1 - Chief Executive's overview. Principal risks are detailed in Section 1.5 - Risk management. To provide clear and helpful information, we have also considered the voluntary best practice principles of the Reporting statement: Operating and Financial Review (OFR) issued by the Accounting Standards Board (ASB).

The Group's financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), as endorsed by the European Union (EU). However, our Board believes that non-Generally Accepted Accounting Principles

(non-GAAP) measures, which have been used in the Business review, are useful for both management and investors and make it easier to understand our Group's performance.

The most important non-GAAP measures in the Business review include operating profit, European Embedded Value (EEV) operating profit and EEV operating capital and cash generation. All non-GAAP measures should be read together with the Group's IFRS consolidated income statement, consolidated statement of financial position and consolidated statement of cash flows, which are presented in the Group financial statements section of this report.

Going concern

After making appropriate enquiries, the Directors have a reasonable expectation that the Company and the Group as a whole have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements.

IFRS and EEV reporting

The financial results are prepared on both an IFRS basis and an EEV basis. All EU-listed companies are required to prepare consolidated financial statements using IFRS issued by the International Accounting Standards Board (IASB) as endorsed by the EU. EEV measures the net assets of the business plus the present value of future profits expected to arise from in-force long-term life assurance and pensions policies. The IFRS financial results in the Business review and in the Group financial statements section of this report have been prepared on the basis of the IFRS accounting policies in the Group's Annual Report and Accounts 2012. The EEV basis has been determined in accordance with the EEV Principles and Guidance issued in May 2004 and October 2005 and the revised Interim Transitional Guidance issued in September 2012 by the Chief Financial Officers (CFO) Forum. The CFO Forum represents the chief financial officers of major European insurers, including Standard Life. EEV methodology has been applied to covered business, which mainly comprises the Group's long-term savings business. Non-covered business is reported on an IFRS basis. The EEV financial results in the Business review, and in the EEV financial information section of this report have been prepared in accordance with the EEV methodology in Note 17 of the EEV financial information section of this report for 2012, and in the relevant EEV methodology notes included in the Annual Report and Accounts 2011 in respect of the comparative period.

Group operating profit and EEV operating profit

The 2012 reconciliation of consolidated operating profit to IFRS profit for the year, presented on page 41 of this report, presents profit before tax attributable to equity holders adjusted for non-operating items. Further details on the calculation of Group operating profit is presented in the accounting policies section of this report - Note 2.1 (a) Basis of preparation. Group operating profit has not been audited by our independent auditors. The 2012 EEV consolidated income statement on page 70, presents EEV profit showing both operating and non-operating items. By presenting our results in this way, the Directors believe they are presenting a more meaningful indication of the underlying business performance of the Group.

Forward-looking statements

This document may contain 'forward-looking statements' about certain of the Standard Life Group's current plans, goals and expectations relating to future financial conditions, performance, results, strategy and objectives. Statements containing the words: 'believes', 'intends', 'targets', 'estimates', 'expects', 'plans', 'pursues', 'seeks' and 'anticipates' and any other words of similar meaning are forward-looking. By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances which may be beyond the Group's control. As a result, the Group's actual financial condition, performance and results may differ materially from the plans, goals and expectations set out in the forward-looking statements, and persons receiving this document should not place undue reliance on forward-looking statements. The Standard Life Group undertakes no obligation to update any of the forward-looking statements in this document or any other forward-looking statements it may make.

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